Venture Capital Isn't For Everyone

Venture Capital

I wanted to comment on last week’s NYT article written by Erin Griffith. It relayed an important topic in a semi-disappointing way, because the article came with a bias that "VC is Evil" because it doesn’t support all types of founders.

Founders don’t “win” by telling VCs to get lost. It demonstrated a high degree of ignorance on how VC works and why it exists.

There is one positive outcome for the article: the debate behind other forms of financing aside from VC.

Josh Kopelman's quote summarizes it well. I’m glad she quoted him for this piece.

Not everyone can or has an interest in building hundreds of millions of value in a few years.

Venture Capital is a good source of financing for very specific cases. Founders tackling problems in large markets is a good use case. We fund companies that want to grow as fast as possible. The most obvious example is a bakery versus a SaaS company. Both can’t command the same valuation or financing needs.

Today it is much easier to become a founder. This created a lot of noise, in which organizations look like tech companies, but aren't. This debate wrapped up in victimization mentality such as "VCs don’t get why my company is special" is unhealthy for founders.

VCs will fund companies that can become a monopoly. If you have a niche company, in a small market, trying to raise VC is a waste of your time. Instead of claiming “we are better because we tell you to get lost”, have a lucid understanding of the economics of the VC business. You have to understand how a fund works, before taking VC so you get to understand the incentives. If VC doesn’t fit what you do, look for alternatives to fund your business. Not raising Venture Capital or raising Venture Capital should not a celebration. Both sides must deliver, and the stakes are high. We (founders and investors) get to celebrate when a successful exit happens. Until then, we execute. I can't buy lunch with paper-markups and founders that don't deliver returns and build value are not winners.

The media loves to talk about large financing rounds, because of power, ego, etc. It is distracting. As a founder of anything, focus on what your customers want. Deliver that and go sell. Don’t pat yourself in the back that you are special because you don’t take VC or because you have taken a ton of VC. Follow your path with peace. Venture Capital is about funding the inevitable. VC helps you get to your destination faster. You can go slower and get there. Good examples of folks that did it without VC are $TEAM and Mailchimp.

An improved suggestion for this headline, that subtracts this victimization-clickbait aura, would be to write something in the lines of: "Founders are maturing and understanding that VC isn’t for everyone."

The “toxic” VC debate isn’t a new concept. Founders need to understand the expectations behind the people that invest in them. We sure do understand the expectations of our investors (LPs).

"The V.C. business model, on which much of the modern tech industry was built, is simple: start-ups raise piles of money from investors, and then use the cash to grow aggressively — faster than the competition, faster than regulators, faster than most normal businesses would consider sane. Larger and larger rounds of funding follow.

The end goal is to sell or go public, producing astonishing returns for early investors. The setup has spawned household names like Facebook, Google, and Uber, as well as hundreds of other so-called unicorn companies valued at more than $1 billion."

But for every unicorn, countless other start-ups grew too fast, burned through investors’ money, and died — possibly unnecessarily. Start-up business plans are designed for the rosiest possible outcome, and the money intensifies both successes and failures. Social media is littered with tales of companies that withered under the pressure of hypergrowth, were crushed by so-called "toxic VCs" or were forced to raise too much venture capital — something is known as the "foie gras effect".

"Other founders have decided the expectations that come with accepting venture capital aren’t worth it. Venture investing is a high-stakes game in which companies are typically either wild successes or near-total failures."

Both founders and investors must understand that the vast minority of companies are supposed to be venture-backed, not the opposite.

The rise in the volume of entrepreneurs does create room for a “middle-market” product. What Bryce & team are doing at Indie.vc is an exciting alternative.

Go out there and be the best version of yourself in the field of battle. But don't claim victory because you rejected a VC. Don't think you are better than others because you took VC or vice-versa.

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